Financial Development and the Velocity of Money Under Interst-Free Financing System: An Empirical Analysis

Author(s)

Hatem Hatef Abdulkadhim Altayee , Mustafa Hassan Mohammad Adam, PhD ,

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Volume 2 - August 2013 (08)

Abstract

This study attempts to empirically examine the impact of financial development on velocity of money under interest-free financing in the Sudan over the period 1992 to 2012, which witnessed significant changes in the structure of financial sector after implimination of the interest-free Islamic banking and financing sytem in the country. This study employed the recent econometric techniques such as volatility model in VAR framework, and Johansen cointegration test. Prior knowledge of a set of explanatory variables such as per capita income, financial development (DD/CU); narrow money supply (M1); and rate of return (margin of murabahah instrument) under interest-free financing as a substitute to rate of interest, also we add inflation, and the spread of commercial bank branch-network. The results show that the velocity of narrow money (VM1) was volatile and persistence in mid 1990s and seems to be more stable and predictable after 2000. The paper confirms the existence of a unique and statistically significant relation between measure of financial development and velocity of narrow money. The Johansen cointegration test result indicates that the existence of long run relationship between velocity of money VM1, on the dependent variables. Furthermore, the VAR result showed that the changes in dependent variables are significantly to influence the changes in velocity of money in the long run in Sudan. The results show that it is important for the central monetary authorities to take into account both stages of financial development in forecasting VM1 for designing effective monetary policy in the Sudan.

Keywords

Financial Development, Velocity of Money, Interest-free financing, Empirical Analysis

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